1 aggregate planning chapter 11 mis 373: basic operations management
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AGGREGATE PLANNINGChapter 11
MIS 373: Basic Operations Management
MIS 373: Basic Operations Management 2
LEARNING OBJECTIVES
• After this lecture, students will be able to 1. Explain what aggregate planning is and how it is useful.2. Identify the variables decision makers have to work with in aggregate
planning.3. Describe some of the graphical and quantitative techniques planners
use.4. Prepare aggregate plans and compute their costs.5. Discuss aggregate planning in services.
MOTIVATIONS
McDonald'sDo you need to know the demand for each burger to plan your labor force?
MIS 373: Basic Operations Management 4
THE PLANNING SEQUENCE
Long-term planning
Intermediate-term planning
Short-term detailed planning
MIS 373: Basic Operations Management 5
THE CONCEPT OF AGGREGATION
• Aggregate planning is essentially a “big-picture” approach to planning.
• avoid focusing on individual products or services• focus on a group of similar products or services
• For purposes of aggregate planning, it is often convenient to think of capacity in terms of labor hours or machine hours per period, or output rates (barrels per period, units per period), without worrying about how much of a particular item will actually be involved.
MIS 373: Basic Operations Management 6
AGGREGATE PLANNING
• The main idea behind aggregate planning:
Aggregate planning translates business plans into rough labor schedules and production plans
• Issues to consider for aggregate planning• Production rate: “aggregate units” per worker per unit time• Workforce level: available workforce in terms of hours• Actual production: Production rate x Workforce level• Inventory: Units carried over from previous periods• Costs: production, changing workforce, inventory
MIS 373: Basic Operations Management 7
AGGREGATE PLANNINGWhat does aggregate planning do?
Given an aggregate demand forecast , determine production levels, inventory levels, and workforce levels, in order to minimize total relevant costs over the planning horizon
Why do organizations need to do aggregate planning?It takes time to implement plans (e.g. hiring).It is not possible to predict with accuracy the timing and volume of
demand for individual items.Planning is connected to the budgeting process which is usually
done annually on an aggregate (e.g., departmental) level.It can help synchronize flow throughout the supply chain; it affects
costs, equipment utilization; employment levels; and customer satisfaction
MIS 373: Basic Operations Management 8
MATCHING DEMAND AND SUPPLY
• Proactive• Alter demand to match supply (capacity)
• Among other approaches, we can alter demand by simply changing the price.
• Reactive• Alter supply (capacity) to match demand
• Through capacity planning and aggregate planning
• Mixed• Some of each
MIS 373: Basic Operations Management 9
DEMAND OPTIONS• Pricing
• Used to shift demand from peak to off-peak periods• Price elasticity is important
• Promotion• Advertising and other forms of promotion• Issue: response rate and response patterns. Less control over timing of
demand (may worsen the problem by bringing demand at the wrong time).
• Back orders (delaying order filling)• Orders are taken in one period and deliveries promised for a later period• Possible loss of sales, increased record keeping, lowered customer service
level
• New demand• Offer different products/services during off-peak periods.
• Yield (Revenue) Management• Maximizing revenue by using a variable pricing strategy. Prices are set relative
to capacity availability.
MIS 373: Basic Operations Management 10
SUPPLY OPTIONS• Hire and layoff workers
• May have upper or lower limit• Unions/internal policies may prohibit layoffs• Skill levels• Associated costs (e.g., recruiting, training, severance-pay, morale)
• Overtime• Overtime may result in lower productivity, poorer quality, more accidents, increased payroll
costs
• Part-time workers• Usually low-to-moderate job skills• Independent-contractors
• Inventories• Produce in one period and sell in another• Costs: holding and carrying cost, money tied up in inventory, insurance, obsolescence,
deterioration, spoilage, breakage etc.
• Subcontracting• Less control over output. Quality problems. • Higher costs
MIS 373: Basic Operations Management 11
AGGREGATE PLANNING SUPPLY STRATEGIES
• Level capacity strategy: • Maintaining a steady rate of regular-time output;
variations in demand are met by using inventories or other options such as overtime, part-time workers, subcontracting, and backorders
• Chase demand strategy: • Matching capacity to demand; the planned output for a
period is set at the expected demand for that period.
MIS 373: Basic Operations Management 12
LEVEL STRATEGY
• Capacities are kept constant over the planning horizon
• Advantages• Stable output rates and workforce
• Disadvantages• Greater inventory (or other) costs
MIS 373: Basic Operations Management 13
CHASE STRATEGY
• Capacities are adjusted to match demand requirements over the planning horizon
• Advantages• Investment in inventory is low• Labor utilization in high
• Disadvantages• The cost of adjusting output rates and/or workforce levels
MIS 373: Basic Operations Management 14
CHOOSING A STRATEGY
• Important factors:• Company policy
• Constraints on the available options• e.g., discourage layoffs, no subcontracting to protects secrets, union
policies regarding over time
• Flexibility• Chase flexibility may not be present for companies designed for
high steady output (e.g., refineries, auto assembly)
• Cost• Alternatives are evaluated in term of cost (while matching
demand within the constraints).
MIS 373: Basic Operations Management 15
EXAMPLE #1: CHASE DEMAND
• Beginning Inventory: 0 units
• Beginning Workforce: 5 workers
• Production Rate: 10 units/worker/period
• Regular Production Costs: $10/unit
• Inventory Costs: $5/unit/period
• Hiring Cost: $200/worker
• Firing Cost: $100/worker
Period 1 2 3 4 5
Demand 40 30 20 50 60
MIS 373: Basic Operations Management 16
EXAMPLE #1: CHASE DEMAND
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production
End Inventory
# Hired
# Fired
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
Beginning Inventory Time Periods
# Hired in the beginning of a period
# Fired in the beginning of a period
MIS 373: Basic Operations Management 17
EXAMPLE #1: CHASE DEMAND
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 30 20 50 60 200
End Inventory
# Hired
# Fired
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
Recall the chase strategy: Capacities are adjusted to match demand requirements over the planning horizon
MIS 373: Basic Operations Management 18
EXAMPLE #1: CHASE DEMAND
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 30 20 50 60 200
End Inventory
0
# Hired 0
# Fired 1
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
MIS 373: Basic Operations Management 19
EXAMPLE #1: CHASE DEMAND
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 30 20 50 60 200
End Inventory
0 0
# Hired 0 0
# Fired 1 1
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
MIS 373: Basic Operations Management 20
EXAMPLE #1: CHASE DEMAND
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 30 20 50 60 200
End Inventory
0 0 0
# Hired 0 0 0
# Fired 1 1 1
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
MIS 373: Basic Operations Management 21
EXAMPLE #1: CHASE DEMAND
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 30 20 50 60 200
End Inventory
0 0 0 0
# Hired 0 0 0 3
# Fired 1 1 1 0
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
MIS 373: Basic Operations Management 22
EXAMPLE #1: CHASE DEMAND
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 30 20 50 60 200
End Inventory
0 0 0 0 0
# Hired 0 0 0 3 1
# Fired 1 1 1 0 0
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
MIS 373: Basic Operations Management 23
EXAMPLE #1: CHASE DEMAND
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 30 20 50 60 200
End Inventory
0 0 0 0 0 0
# Hired 0 0 0 3 1 4
# Fired 1 1 1 0 0 3
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
MIS 373: Basic Operations Management 24
EXAMPLE #1: CHASE DEMAND
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 30 20 50 60 200
End Inventory
0 0 0 0 0 0
# Hired 0 0 0 3 1 4
# Fired 1 1 1 0 0 3
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
One defining characteristics of the chase strategy is that we don’t have end inventory. All we produced are/were sold. No holding cost
MIS 373: Basic Operations Management 25
EXAMPLE #1: CHASE DEMAND
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 30 20 50 60 200
End Inventory
0 0 0 0 0 0
# Hired 0 0 0 3 1 4
# Fired 1 1 1 0 0 3
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
TC=Production + Holding + Hiring + Firing = 200*10 + 0 + 4*200 + 3*100 = $3,100
EXERCISE PROBLEM
• Perform aggregate planning using the chase strategy:• Beginning Inventory: 10 units• Beginning Workforce: 5 workers• Production Rate: 10 units/worker/period• Regular Production Costs: $10/unit• Inventory Costs: $10/unit/period• Hiring Cost: $100/worker• Firing Cost: $200/worker
Period 1 2 3 4 5
Demand 50 40 30 30 40
SOLUTION: CHASE STRATEGY
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production
End Inventory
# Hired
# Fired
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
Beginning Inventory
SOLUTION: CHASE STRATEGY
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production 40 40 30 30 40 180
End Inventory
# Hired
# Fired
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
Beginning Inventory
We only produce 40 units because there are 10 units beginning inventory that we can use.So, we can still meet the demand of 50 units.
SOLUTION: CHASE STRATEGY
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production 40 40 30 30 40 180
End Inventory
0
# Hired 0
# Fired 1
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
Beginning Inventory
The beginning workforce is 5 workers. Since we only produce 40 units in this period and each worker can handle 10 units in a period, we only need 4 works here. We hence fire 1 at the beginning of this period.
SOLUTION: CHASE STRATEGY
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production 40 40 30 30 40 180
End Inventory
0 0
# Hired 0 0
# Fired 1 0
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
SOLUTION: CHASE STRATEGY
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production 40 40 30 30 40 180
End Inventory
0 0 0
# Hired 0 0 0
# Fired 1 0 1
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
SOLUTION: CHASE STRATEGY
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production 40 40 30 30 40 180
End Inventory
0 0 0 0
# Hired 0 0 0 0
# Fired 1 0 1 0
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
SOLUTION: CHASE STRATEGY
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production 40 40 30 30 40 180
End Inventory
0 0 0 0 0 0
# Hired 0 0 0 0 1 1
# Fired 1 0 1 0 0 2
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
SOLUTION: CHASE STRATEGY
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production 40 40 30 30 40 180
End Inventory
0 0 0 0 0 0
# Hired 0 0 0 0 1 1
# Fired 1 0 1 0 0 2
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
TC=Production + Holding + Hiring + Firing = 180*10 + 5*10 + 1*100 + 2*200
MIS 373: Basic Operations Management 35
EXAMPLE #2: LEVEL CAPACITY
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production
End Inventory
# Hired
# Fired
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Holding Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
MIS 373: Basic Operations Management 36
EXAMPLE #2: LEVEL CAPACITY
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 40 40 40 40 200
End Inventory
# Hired
# Fired
Total demand=40+30+20+50+60=200Production per period=200/5=40
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Holding Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
Recall the level strategy: Capacities are kept constant over the planning horizon. So,
MIS 373: Basic Operations Management 37
EXAMPLE #2: LEVEL CAPACITY
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 40 40 40 40 200
End Inventory
0
# Hired 0
# Fired 1
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Holding Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
MIS 373: Basic Operations Management 38
EXAMPLE #2: LEVEL CAPACITY
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 40 40 40 40 200
End Inventory
0
# Hired 0
# Fired 1
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Holding Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
Fire 1 worker in this period because 4 workers are sufficient to produce 40 units in a period.
MIS 373: Basic Operations Management 39
EXAMPLE #2: LEVEL CAPACITY
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 40 40 40 40 200
End Inventory
0 10
# Hired 0 0
# Fired 1 0
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Holding Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
MIS 373: Basic Operations Management 40
EXAMPLE #2: LEVEL CAPACITY
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 40 40 40 40 200
End Inventory
0 10 30
# Hired 0 0 0
# Fired 1 0 0
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Holding Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
MIS 373: Basic Operations Management 41
EXAMPLE #2: LEVEL CAPACITY
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 40 40 40 40 200
End Inventory
0 10 30 20
# Hired 0 0 0 0
# Fired 1 0 0 0
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Holding Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
MIS 373: Basic Operations Management 42
EXAMPLE #2: LEVEL CAPACITY
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 40 40 40 40 200
End Inventory
0 10 30 20 0
# Hired 0 0 0 0 0
# Fired 1 0 0 0 0
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Holding Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
MIS 373: Basic Operations Management 43
EXAMPLE #2: LEVEL CAPACITY
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 40 40 40 40 200
End Inventory
0 10 30 20 0 60
# Hired 0 0 0 0 0 0
# Fired 1 0 0 0 0 1
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Holding Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
MIS 373: Basic Operations Management 44
EXAMPLE #2: LEVEL CAPACITY
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 40 40 40 40 200
End Inventory
0 10 30 20 0 60
# Hired 0 0 0 0 0 0
# Fired 1 0 0 0 0 1
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Holding Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
One defining characteristics of the level strategy is that we don’t need to adjust capacity (here, labor force), except for the initial period.
MIS 373: Basic Operations Management 45
EXAMPLE #2: LEVEL CAPACITY
0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 40 40 40 40 200
End Inventory
0 10 30 20 0 60
# Hired 0 0 0 0 0 0
# Fired 1 0 0 0 0 1
Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Holding Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker
TC=Production + Holding + Hiring + Firing
But, how to calculate the holding cost? Average inventory in a period
MIS 373: Basic Operations Management 46
EXAMPLE #2: LEVEL CAPACITY0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 40 40 40 40 200
End Inventory
0 10 30 20 0 60
Average Inventory
0 5 20 25 10 60
# Hired 0 0 0 0 0 0
# Fired 1 0 0 0 0 1
We can estimate the holding cost by considering the average inventory in each period.
Regular Production Costs: $10/unit
Inventory Holding Costs: $5/unit/period
Hiring Cost: $200/worker
Firing Cost: $100/worker
=(0+10)/2=(10+30)/2
MIS 373: Basic Operations Management 47
EXAMPLE #2: LEVEL CAPACITY0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 40 40 40 40 200
End Inventory
0 10 30 20 0 60
Average Inventory
0 5 20 25 10 60
# Hired 0 0 0 0 0 0
# Fired 1 0 0 0 0 1
TC= 200*10 + 60*5 + 0*200 + 1*100 = $2,400TC=Production + Holding + Hiring + Firing
Regular Production Costs: $10/unit
Inventory Holding Costs: $5/unit/period
Hiring Cost: $200/worker
Firing Cost: $100/worker
=(0+10)/2=(10+30)/2
MIS 373: Basic Operations Management 48
EXAMPLE #2: LEVEL CAPACITY0 1 2 3 4 5 Total
Demand 40 30 20 50 60 200
Production 40 40 40 40 40 200
End Inventory
0 10 30 20 0 60
Average Inventory
0 5 20 25 10 60
# Hired 0 0 0 0 0 0
# Fired 1 0 0 0 0 1
TC= 200*10 + 60*5 + 0*200 + 1*100 = $2,400TC=Production + Holding + Hiring + Firing
Regular Production Costs: $10/unit
Inventory Holding Costs: $5/unit/period
Hiring Cost: $200/worker
Firing Cost: $100/worker
=(0+10)/2=(10+30)/2
EXERCISE PROBLEM
• Perform aggregate planning using the level strategy:• Beginning Inventory: 10 units• Beginning Workforce: 5 workers• Production Rate: 10 units/worker/period• Regular Production Costs: $10/unit• Inventory Costs: $10/unit/period• Hiring Cost: $100/worker• Firing Cost: $200/worker
Period 1 2 3 4 5
Demand 50 40 30 30 40
Two additional assumptions: 1. Unmet demands in a period can be held and fulfilled in a future period.2. There is no cost associated with unmet demands.
SOLUTION: CHASE STRATEGY
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
Beginning Inventory
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production
End Inventory
Avg. Inventory
# Hired
# Fired
SOLUTION: CHASE STRATEGY
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
Beginning Inventory
Total demand=190Total demand=190 – 10 = 180Production per period=180/5=36
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production 36 36 36 36 36 180
End Inventory
Avg. Inventory
# Hired
# Fired
SOLUTION: CHASE STRATEGY
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
Beginning Inventory
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production 36 36 36 36 36 180
End Inventory -4
Avg. Inventory 3
# Hired 0
# Fired 1
By assumption #1, unmet demands in a period can be held and fulfilled in a future period. So, we keep track on the unmet demands, and try to fulfill them in a future period.
SOLUTION: CHASE STRATEGY
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
Beginning Inventory
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production 36 36 36 36 36 180
End Inventory -4
Avg. Inventory 3
# Hired 0
# Fired 1
Avg. inventory = [10 + (-4)]/2 = 3
SOLUTION: CHASE STRATEGY
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
Beginning Inventory
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production 36 36 36 36 36 180
End Inventory -4 -8
Avg. Inventory 3 -6
# Hired 0 0
# Fired 1 0
-8 = (-4) + (-4)Unmet demand from period #1 and from period #2
SOLUTION: CHASE STRATEGY
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
Beginning Inventory
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production 36 36 36 36 36 180
End Inventory -4 -8 -2
Avg. Inventory 3 -6 -5
# Hired 0 0 0
# Fired 1 0 0
SOLUTION: CHASE STRATEGY
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
Beginning Inventory
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production 36 36 36 36 36 180
End Inventory -4 -8 -2 4
Avg. Inventory 3 -6 -5 1
# Hired 0 0 0 0
# Fired 1 0 0 0
SOLUTION: CHASE STRATEGYBeginning Inventory
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production 36 36 36 36 36 180
End Inventory -4 -8 -2 4 0
Avg. Inventory 3 -6 -5 1 2
# Hired 0 0 0 0 0 0
# Fired 1 0 0 0 0 1
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
SOLUTION: CHASE STRATEGY
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
Beginning Inventory
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production 36 36 36 36 36 180
End Inventory -4 -8 -2 4 0
Avg. Inventory 3 -6 -5 1 2
# Hired 0 0 0 0 0 0
# Fired 1 0 0 0 0 1
By assumption #2, there is no cost associated with unmet demand (i.e., negative inventory has no costs).
TC=Production + Holding + Hiring + Firing = 180*10 + 10*(3+1+2) + 0 + 1*200 = $2,030
SOLUTION: CHASE STRATEGY
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
10 1 2 3 4 5 Total
Demand 50 40 30 30 40 190
Production 36 36 36 36 36 180
End Inventory
Avg. Inventory
# Hired
# Fired
Tim suggested another way to solve this problem. Pushing unmet demands to its next period
SOLUTION: CHASE STRATEGY
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
10 1 2 3 4 5 Total
Demand 50 40 44 30 30 40 190
Production 36 36 36 36 36 180
End Inventory 0
Avg. Inventory 5
# Hired 0
# Fired 1
Tim suggested another way to solve this problem. Pushing unmet demands to its next period Instead of -4 end inventory, here we have 0. See that the demand for period #2 increase
from 40 to 44.
SOLUTION: CHASE STRATEGY
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
10 1 2 3 4 5 Total
Demand 50 40 44 30 38 30 40 190
Production 36 36 36 36 36 180
End Inventory 0 0
Avg. Inventory 5 0
# Hired 0 0
# Fired 1 0
SOLUTION: CHASE STRATEGY
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
10 1 2 3 4 5 Total
Demand 50 40 44 30 38 30 32 40 190
Production 36 36 36 36 36 180
End Inventory 0 0 0
Avg. Inventory 5 0 0
# Hired 0 0 0
# Fired 1 0 0
SOLUTION: CHASE STRATEGY
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
10 1 2 3 4 5 Total
Demand 50 40 44 30 38 30 32 40 190
Production 36 36 36 36 36 180
End Inventory 0 0 0 4
Avg. Inventory 5 0 0 2
# Hired 0 0 0 0
# Fired 1 0 0 0
SOLUTION: CHASE STRATEGY
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
10 1 2 3 4 5 Total
Demand 50 40 44 30 38 30 32 40 190
Production 36 36 36 36 36 180
End Inventory 0 0 0 4 0 4
Avg. Inventory 5 0 0 2 2 9
# Hired 0 0 0 0 0 0
# Fired 1 0 0 0 0 1
SOLUTION: CHASE STRATEGY
Beginning Inventory: 10 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $10/unit/periodHiring Cost: $100/workerFiring Cost: $200/worker
10 1 2 3 4 5 Total
Demand 50 40 44 30 38 30 32 40 190
Production 36 36 36 36 36 180
End Inventory 0 0 0 4 0 4
Avg. Inventory 5 0 0 2 2 9
# Hired 0 0 0 0 0 0
# Fired 1 0 0 0 0 1
TC=Production + Holding + Hiring + Firing = 180*10 + 10*9 + 0 + 1*200 = $2,090
While the TC number is different, this approach seems more intuitive than the previous approach, especially on the parts about inventory.
MIS 373: Basic Operations Management 66
AGGREGATE PLANNING IN SERVICES
• The aggregate planning process is different for services in the following ways:
• Most services cannot be inventoried• Demand for services is difficult to predict• Capacity is also difficult to predict• Service capacity must be provided at the appropriate place and time• Labor is usually the most constraining resource for services
MIS 373: Basic Operations Management 67
AGGREGATE PLANNING IN SERVICES
• Hospitals:• allocate funds, staff, and supplies to meet the demands of patients for
their medical services
• Restaurants:• smoothing the service rate, determining workforce size, and
managing demand to match a fixed capacity• Perishable inventory
• Airlines:• complex due to the large number of factors involved (planes, flight &
group personnel, multiple routes, airports etc.)• Capacity decisions must also take into account the percentage of
seats to be allocated to various fare classes in order to maximize profit or yield (Revenue Management)
MIS 373: Basic Operations Management 68
KEY POINTS
• An aggregate plan is an intermediate-range plan for a collection of similar products or services that sets the stage for shorter-range plans.
• Two aggregate planning supply strategies are 1) chase demand strategy and 2) level capacity strategy.